Weapons of financial mass destruction threaten new meltdown
On the fifth anniversary of the great global financial meltdown, set in motion by the collapse of Lehman Brothers on Wall Street, the government’s narrative about the state of the economy is at odds with those in the know.
On the one side, the ConDems are talking up indicators that could show that things are on the up and up. They hail accelerating economic growth, rising house prices, official figures about falling unemployment, record profits for the banks and continuing low interest rates.
But sober financial experts on both sides of the Atlantic warn that none of the causes of the biggest crash in history have been removed. Indeed, quite the opposite.
The Bank for International Settlements warned that investors were flooding en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”. William White, the BIS’s former chief economist, said: “This looks like to me like 2007 all over again, but even worse.”
Chief among the indicators that another meltdown is looming is what some term “the financialisation” of the economy. This is a renewed and massive increase in the power and size of the banks and the global money markets. Alongside this are huge rises in government debts.
At the same time, the oversight that governments, financial experts and international institutions insisted was needed to prevent a repeat has not happened. Putting rules and regulations in place – with powers to enforce them – has proved to be impossible.
Daily Telegraph financial writer Jeremy Warner has warned that “the underlying fault lines that created the crisis in the first place” have worsened. And his concern about the absence of serious financial reform is amply reinforced by Time magazine’s cover story, “How Wall Street Won, the myth of financial reform”.
Rana Foroohar writes that the “financialisation of the American economy, a process by which the nation has become inexorably embedded in Wall Street” just keeps rolling on. She notes:
US financial institutions remain free to gamble billions on risky derivatives around the world. A crisis in Europe, for instance could still potentially devastate a US institution that made a bad bet and in turn, send shockwaves through the $2.7 trillion held in US money market funds, much of which is owned by Main Street investors.
Faroohar’s recommendations point to the scale of the problem. She says that what is needed is to fix the too-big-to-fail problem; limit leverage; expose “weapons of mass financial destruction”; bring shadow banking into the light and “reboot the culture of finance”.
In her dreams!
Her argument is reinforced by the top US Federal Reserve official responsible for oversight, Daniel Tarullo. He says that regulators should force the biggest banks to reduce their borrowings and improve their liquidity. Post-financial crisis rules were inadequate and left too much “too-big-to-fail risk”.
Despite new financial rules introduced by president Obama, the reality is that regulation has proved impossible. An extraordinary investigation by journalist Massimo Calabresi demonstrates how the privatisation of banking oversight has turned financial regulation into a massively profitable – and politically incestuous – industry.
Under new US laws, private accounting firms have taken over from publicly-accountable examiners. The complexity of global banking and the legal attempt to “control” them have become so complex that it appears that only outside consultants can actually fathom them.
But this “insider knowledge” comes at a deeply compromising price. The reality is that the “the revolving door between Washington and Wall Street [is] still spinning like a top”, Calabresi concludes.
Julie Williams was disgraced in her role as primary regulator for the Office of the Comptroller of the Currency. But this did not prevent her from becoming gamekeeper-turned-poacher. Earlier this year she was hired by the giant accounting firm Promontory as managing director. And, you’ve guessed it, Promontory helps banks self-regulate and find a route round government oversight. Promontory raked in nearly half the £1 billion consultancy fees paid by the banks to private consultants.
The story of Promontory and the US regulators is only the proverbial tip of the iceberg and reveals that independent – or any other – regulation is a pipe dream. The last five years are proof if proof be needed that the financial markets are an out-of-control beast.
The global capitalist economy remains debt driven while the financial sector still resembles the house of cards that fell apart in 2007. Stand by for Meltdown II.
A World to Win secretary
16 September 2013